Friday, August 31, 2007

Poor Diet and The Poor

The current received wisdom is that healthy food is beyond the reach of America's poor, hence their rising obesity and related poor health. My experience suggests this is simply wrong. Healthy food is still much cheaper than garbage-food--fast food, convenience food, snacks, soft drinks and all the other stalwarts of the standard American diet "enjoyed" by rich and poor alike.

"Another factor in obesity rates is poverty. The five poorest states were all in the top 10 when it came to obesity rates. An exception to that rule was the District of Columbia and New Mexico. Both had high poverty rates, but also one of the lower obesity rates among adults.

Poverty can lead to less safe neighborhoods, which deter children from playing. It can lead to fewer grocery stores offering fruits and vegetables, and it can lead to greater reliance on fast food, officials said. "It seems the cheapest foods are the worst ones for you," Marks said."

A July 2007 study from the Johns Hopkins Bloomberg School of Public Health estimates that 75 percent of American adults and 24 percent of American children will be overweight or obese by 2015. During my residency, patients weighing more than 325 pounds used to be transferred from the hospital to local zoo scanners for imaging."

Granted, poor neighborhoods are inherently unsafe for many reasons. But the inaccessibility of healthy food is not one of them.

The cliche is that the poor have little access to groceries. That too is simply wrong. We shop in low-income, gritty neighborhoods which are home to "poor" people, i.e. those living on less than middle-class incomes. The fact is that the cheapest groceries are in "poor" neighborhoods.

Yes, if you insist on doing your grocery shopping at the corner liquor store, you may not find inexpensive, healthy foods. But if you walked a block down to the Hispanic/Mexican market, you would find vine-ripened tomatoes, 3 pounds for a dollar, 4 ears of corn for a dollar, a huge bag of beans for a couple bucks, and fresh bakery rolls for less than a dollar.

Yes, these are tough neighborhoods. That's where the "poor" can afford to live. That's why the ethnic grocery stores are located there rather than in some high-rent yuppie paradise.

I should note here that based on my taxable income, I am not exactly rolling in moolah either ($22K gross income, $14K taxable income). Why aren't I rich? Because I'm an idiot!

Be that as it may, we eat very well and we do it by shopping in "poor" neighborhoods at ethnic stores which cater to "poor" people and cooking our own meals.

Every cliche about how difficult and impossible it is to eat well if you're poor in America is simply wrong. The poor don't have cars, so they can't go to a grocery store. My wife takes a bus to Chinatown; every major shopping district in the Hispanic neighborhoods, every Indian or Pakistani or Iranian store or Halal is on a major bus line. I can be at the local bulk foods store (owned by southeast Asians) or the Mexican market in 10 minutes on my bicycle.

Do the poor have no time to cook? Based on surveys, Americans of all incomes watch horrendous amounts of useless, mind-numbing television. I am sorry to pop all the balloons about how awful and difficult it is to eat well in America on a limited income, but the solution is not difficult at all: buy real food at bargain prices in ethnic grocery stores, and cook this real food into real meals instead of watching hopelessly moronic TV shows (including those cuisine-porno shows on Food Network).

In the half-hour some "poor" citizen sat on their duff watching a useless TV show, they could have cooked a delicious and nutritious chicken-green bean dish in an Indian style or Chinese style. I know, because even "poor" me pulls this off, with a recipe you can download for free at any public library or copy off a cookbook from that library. I am no cooking-show wizard, just an average person who can read a recipe.

But what about all those fancy pans and appliances you see the TV chefs use? All you really need is one decent knife and a wok or equivalent pan. That's what hundreds of millions of Chinese and other Asian families use to cook an immense variety of dishes.

All this flies in the face of what's considered "affordable." A friend's teenager was just enthusing over the meals at a fast-food chain called Nations--huge portions, she reported, fries and a soda, all for only $6. Six bucks for one garbage, high-fat, high sucrose meal? I walked out of the Mexican market on International Blvd. last week with a full grocery bag of real food for $5.45. That is the truth: tomatoes, much better tasting than the plastic-fantastic found at Safeway, potatoes, garlic, veggies, fresh corn, some bread rolls, even a piece of bread pudding for dessert (a low-fat, low-sugar one at that), large enough for two of us--yes, for less than $6.

"But meat is so expensive." Well, how about eating less of it? It's not good for you anyway to consume vast quantities of meat. The lower you eat on the food chain, the better it is for the planet and the better for your health. One piece of chicken or pork makes a darned fine stir-fry which serves four.

Or how about scanning those free shopping flyers everyone gets in the mail from the local supermarket chain? If you sign up for Safeway's "club card", you can often get 2-for-1 sales on all kinds of meat. I recently bought a roast on an advertised sale, sliced it myself in about 15 minutes and the resulting plate of low-fat, high-quality steak served six people, with leftovers for lunch. All for about the same cost as two "cheap" fast-food meals.

And Safeway is on the bus line, too.

Don't have a membership at Costco, or can't get to Sam's Club? How hard is it to find a co-worker or neighbor who goes to one of these big-box stores? Would they be willing to buy you some paper towels and bulk flour? Probably.

"Food is so expensive." Yes, some of it is. But it is cheaper at the ethnic groceries, and the quality is often better than you'll find at the chain supermarkets. Our close friends operate an Indian market, and they are at the regional produce wholesalers open market at 4 a.m., buying the best quality vegetables and fruits available. Cultures which have a much greater focus on food and cooking than the mainstream America portrayed in ads and the media--Indian-Americans, Iranian-Americans, Korean-Americans, Chinese-Americans, Hispanic Americans, to mention but a few types of Americans who support small groceries in cities large and small, and neighborhoods rough and upscale alike--care about the quality and price of their food, and the markets cater to their desire for excellent quality at the lowest possible prices.

If you eat rice, you can buy huge 25-pound bags at your local Halal or Korean market for less than $10. Basmati, long-grain, brown, you name it--it's all insanely cheap. Ditto for 25 pounds of pinto beans and 10 or 25-pound bags of flour. If you travel overseas, check out the food prices in Europe, Japan or elsewhere. Food in the U.S. is still relatively cheap.

I understand that this is mostly urban-America-related--but rural Americans have the luxury of growing their own food at least a third of the year. Even on a very small garden plot which is surrounded by 3-story buildings, we grow more veggies than we can consume ourselves: lettuce, green beans, etc. And the soil is clay, not great by any means; the sun is limited by the neighboring structures, and the climate is often foggy/overcast, even in summer. Yet we still managed to bake 14 pies from the bounty of our one peach tree. And it wasn't even a very good yield this year. (We gave away/shared most of the pies, but kept a few in the freezer.)

And even small-town America is now often served by a Halal, Hispanic, Asian or Indian grocery store. Hey, you may be the only Caucasian or African-American customer at any given moment, but check out the freshness and the prices.

The problem isn't being poor--it's being ignorant of basic nutrition, shopping and cooking, and being unmotivated to do something about it. We as a nation are far more interested in watching the Food Network (cable or satellite TV being another waste of $60/month that even "poor" people seem to manage) than in actually cooking.

Has our educational system completely failed to educate our young about nutrition, household management and cooking? Yes, absolutely. And so now we get to throw up our hands and blame some bureaucracy, or budget cuts, or an uncaring Federal government?

I am especially tired of hearing about how "busy" Americans are and as a result they have no time to cook. It takes literally two minutes to combine rolled oats (59 cents/pound), raisins and some honey and make a decent breakfast. It takes literally five minutes to mix up some pancake batter from scratch--come on, folks, there's only five ingredients. You can make a giant pot of pasta sauce from scratch in less than an hour--which is literally one-sixth of the daily average time Americans watch TV. And that pasta sauce will last 2-3 meals, even if there's 6 people in your household.

These are all meals with costs of about 25-50 cents per serving, or even less.

How to find time to cook? Easy--stop watching TV or other "entertainment." Not watching TV supposedly makes you a snob, but really, who has that much time to waste? I don't. Like you, I get up at 5:30 or 6 a.m. and have to get cracking. (The fact that I write books no one wants to publish or read makes me stupid, granted, but it does take a lot of time, as does this site.)

Hey, we're all busy. But is it really so impossible to cook or get any exercise? Yes, if you live in a real ghetto, it's dangerous to go walking around outside. But probably less than 5% of Americans live in such hard-core bullets-flying ghettos. Yes, in harsh winter conditions, going outside isn't that healthy, either. But on the other hand, all you need for a home gym is enough room to swing your arms around--six feet by six feet.

Rambling on about cooking real, unprocessed food into real meals--I know it sounds like a health nut or food-snob rant, but it's simpler than that: I have high blood pressure, and so everything with empty calories, high fructose and/or high salt is out. That means essentially everything in the standard American diet is off the menu: packaged food, frozen dinners, canned soups, juices (mostly sugars and empty calories), Jamba Juice and Frappucino calorie-fests, chips and other high-salt snacks, cookies, doughnuts, all fast food and most ethnic-restaurant food--out. Cutting out all the high-salt, high-fat, high-sugar stuff (other than what we bake at home, where we can control the salt, butter and sugar) has lowered my blood pressure appreciably.

It's a simple choice that many who are recovering from cancer, heart disease, etc. make-- living healthy means eating healthy, which means standard American convenience food/fast-food/snacks /drinks are rarely on the table.

The mainstream media seems extremely interested in offering up excuses: for people signing up for obviously bad-deal mortgages, for people buying expensive fat and sugar-loaded garbage food instead of real food, for people watching 6 hours of TV or MySpace a day but being unable to muster the time or energy to actually prepare a real meal--and so "being poor" is now the catch-all excuse for poor health. Never mind that middle-class people are roughly equal in obesity and poor health--so what's their excuse?

Where do all these excuses lead us? What do we as a society and as individuals get out of all the excuses? "Permission to wallow in self-pity"? Is that really the best path? It is simply fact that modestly careful shopping and preparing real food is not beyond most Americans, who spend inordinate amounts of time sitting in brain-dead torpor in front of the television or other "entertainment" device.

If that's how we choose to spend our lives, fine. But let's not make excuses about how we as a society are in such poor health because we're too busy to be healthy or too poor to buy and prepare real food.

Thank you, Jim V., ($20) for your much-appreciated donation to this humble site. I am greatly honored by your support and readership. All contributors are listed below in acknowledgement of my gratitude.

Thursday, August 30, 2007

Living in Extraordinary Times

We are living in extraordinary times. No, not because of the iPod or other electronic frippery. We are the last humans who will experience cheap petroleum.

Yes, Peak Oil, depletion, whatever you want to call it, looms just ahead, and here is the evidence. Frequent contributor/resource analyst U. Doran recommended these articles, which make an ironclad case for declining production which will soon be unable to meet global demand: World Oil Forecasts Including Saudi Arabia - Update Aug 2007

"World total liquids production (Fig 1) remains on a peak plateau since 2006 and is forecast to fall off this peak plateau in 2009. According to the IEA, the current peak production of 86.13 mbd occurred on July 2006 and only one year later, June 2007 total liquids production fell to an unexpectedly low 84.28 mbd. As long as demand continues increasing then prices will also continue increasing.

World oil discovery rates peaked in 1965 (Fig 4) and production has exceeded discovery for every year since the mid 1980s. Discoverable reserves in giant fields also peaked during the mid 1960s (Fig 5). The time lag between world peak discovery in 1965 and world peak production in 2005 of 40 years is similar to the time lag of 42 years for the USA Lower 48 (Fig 6)."

Longtime readers will find nothing new here; I have posted numerous charts and links over the past two years popping every fantasy that shale oil from Canada is the solution, there is plenty of oil in the ground, etc. etc. Yes, there may well be--but it's no longer cheap to bring to the surface.

So what's this mean to you? That is up to you. Can this knowledge be leveraged into financial gain by us small-fry? Well, glance at this chart of oil 1987-2006 and tell me if investing in the petroleum industry in 1999 or 2002 was an investment which paid handsome returns:

Is this advice? No. It is simply information. There are no easy answers in the financial world, or indeed, in any world. As I often observe: If it is were easy, we'd all be millionaires. You cannot become wealthy by following the simplistic "BUY!!" recommendations of Fools or Pundits or Screaming Entertainers. You have to acquire financial/investment self-knowledge and knowledge of the world, and then base decisions on that knowledge.

So what does the end of cheap oil mean to you? Perhaps it means you sell your V-8 truck and get a 4-cylinder version. Maybe it means you sell your house in the exurbs and move closer to your job/school, etc. (renting, of course, until housing falls 50+% from today's prices). Maybe you start looking at candidates' stands on energy policies. Or maybe you decide to switch some 401K funds into an energy-centric mutual fund which invests in both petroleum and alternative energy companies. Maybe you decide to do nothing. That's all up to you.

The goal here at OfTwoMinds is to try to make sense of the larger forces at work in our world. How you deploy that knowledge--assuming you don't reject it as wrong, which is also a possibility--is up to you. Advice is cheap, knowledge is dear. That said, here is a chart of the XLE energy sector ETF:

While the fundamental evidence presented in the above articles would suggest higher energy prices are our future, this chart has cross-currents. The declining RSI suggests weakness, while the MACD suggests a bottom may be forming. The 5-month uptrend appears to have been broken, and a wedge formation can be discerned. Wedges tend to break up or down, often in a big move. You could argue for a move down by noting that a softening economy will lower demand, or argue for a move up by noting the rapidly rising demand in Asia and India for petroleum.

No one knows what will happen in the future. However, if you put together the information in the Oil Drum article and the interview with Matt Simmons with the data displayed in these charts, you can probably reach some conclusions on the preponderance of evidence. Is oil likely to stay cheap for a long time? There seems to be a lot of "maybe's" and not much hard evidence to support this notion.

"With oil, gas and electricity prices soaring, companies worldwide are beginning to realize that saving energy can translate into dramatically lower costs. And that means higher profits and happier shareholders -- not to mention a cleaner planet. Still, most companies are moving slowly in implementing these types of energy-saving changes -- if at all."

The link requires an online subscription, but you can always read it for free at a library.

Late breaking addition: Knowledgeable reader DLF sent in an unsettling chart of gasoline inventories, with this note and links to source data:

As the chart below indicates, not only is the absolute level of inventories low (see Figure 4 in the Weekly Petroleum Status Report), but in terms of days of supply, it is the lowest ever recorded ( the days of supply data goes back to March 1991), reaching just 20 days. This is even fewer days than seen following the hurricanes in 2005.Here is the chart:

To repeat: there is no investment advice offered on this site. All that is presented is data, information and charts which are open to interpretation. Will some canny types look at this and promptly buy gasoline futures, so as to capture the rise in prices which this chart suggests may well transpire? Well, why would anyone sell gasoline futures, when the supply is at multi-year lows? This is not advice, just an observation. If gasoline prices rise sometime in the next few months, you may recall this chart.

Here's what the Energy Information Administration had to say in its report This Week In Petroleum (released August 29, 2007):

"What this means is that while retail prices are not expected to jump sharply on a national average, they are also unlikely to fall dramatically over the next few weeks. Of course, this expectation is based on the assumption that there are no major hurricanes or other non-market events impacting petroleum infrastructure over the next few weeks. (emphasis added) With no storms forming in the Atlantic as of this writing, that should be considered as another bit of good news for drivers."

Lest those reassurances leave an unrealistically warm and fuzzy afterglow, consider this chart of hurricanes per year.

The rising trendline suggests that last year's complete absence of hurricanes in the oil-patch regions of the Gulf of Mexico was an anomaly which may not be repeated.

Poor Dumb Writer Disclosure: I own shares and calls (options) in integrated energy company APC. This is not a recommendation or advice, merely a disclosure that I have long had a financial stake in an oil/gas stock.

Thank you, Tom S., ($50) for your extremely generous donation to this humble site. I am greatly honored by your support and readership. All contributors are listed below in acknowledgement of my gratitude.

Wednesday, August 29, 2007

A Quick Glance at Gold

Long-time contributor Fastwater had this suggestion: "Your readers might like a heads-up on the technical analysis of gold." Since we noted yesterday that gold has recently outperformed other asset classes, this is an eminently timely suggestion.

In this 5-year chart of the HUI (gold stocks index), one pattern is rather obvious: long periods of consolidation are followed by sharp uplegs. Note that this is a chart of gold mining stocks, not the price of gold. On some occasions the stocks outperform the metal itself, and on others they lag behind gold. For the purposes of investing, I have chosen the HUI as the stocks have over time outperformed the metal.

Note that the current consolidation period is almost exactly the same duration as the previous period of consolidation. Note also that Relative Strength (RSI) and MACD (moving average convergence-divergence) declined during the trading-range bound consolidation periods.

A relatively long-term chart like this can't be expected to reveal the day or week when a pattern might turn, but this chart certainly suggests that the long period of consolidation which has been playing out since May 8, 2006 may be drawing to an end, presaging another sharp upleg. Will this happen? No one knows, but this pattern of consolidation followed a move to higher levels opens the possibility, if not the likelihood, of such a move in the near future.

Frequent contributor U. Doran recommended this article Value of Gold vs. the Dollar by Ed Bugos, which describes a very interesting relation between the dollar and sharp uplegs in the price of gold.

Poor Dumb Writer Disclosure: I own shares and calls (options) in gold miner MDG. This is not a recommendation or advice, merely a disclosure that I have a financial stake in a gold stock.

Thank you, Fastwater and U. Doran, for the suggestions.

Thank you, Lloyd L., ($50) for your extremely generous donation to this humble site. I am greatly honored by your support and readership. All contributors are listed below in acknowledgement of my gratitude.

Tuesday, August 28, 2007

A common reader query here at OfTwoMinds is: what can I do to protect myself financially from the coming unraveling? There is no easy answer, of course, for many reasons.

One, I am not qualified nor prepared to offer investment advice of any kind. Two, if I were foolish enough to advise buying XYZ today, tomorrow it would be hit with news which caused it to crash, and three, the only person who can properly assess an investor's risk appetite, financial situation and investing style is the investor himself/herself. There is no shortcut to this financial self-knowledge.

That said, there are some basic strategies which can be useful. One is "relative performance," described here by frequent contributor Harun I.:

It has been my observation that the majority of people make investment decisions based on many things but no weight is given to the most important factor, that being whether the investment is increasing purchasing power. (emphasis added)

In my humble view investment decisions must start with asset-class performance (stocks, bonds, commodities) against an accepted measure of value such as gold, broad market performance, and sector performance. The current mass thinking in the diversification and buy-and-hold theory has one keeping poor performing assets which makes no sense to me. This thinking doesn’t respect differences in time horizon.

If people were willing to shift an hour of their time daily to do proper research then they would find that their investment results would be much different.

So let's take the oil sector and see what we can make of it. We start with a long-term chart of light crude oil with a relative-performance comparative to gold:

Harun's comment: "Where the red line is rising (1985 and 2000 peaks) oil was outperforming gold. From 2005-mid 2006 oil underperformed gold as noted by the decline of the red line."

Next, let's look at a chart (courtesy of Harun) of an integrated oil/energy company, Exxon Mobil (ticker symbol XOM) plotted with relative-performance comparatives to the S&P 500 and gold:

Harun provided this explanation:

With Gold the denominator, when the red line is rising the numerator, which in this case is XOM, is outperforming Gold. When the red line is declining XOM is underperforming gold. The only significance of the red line being above or below price is the relative value (how much can be purchase with XOM), which is not to be confused with performance.

The same goes for the blue line which measures the performance of XOM relative to the SP 500. When the blue line is rising XOM is outperforming the SP 500, when the blue line is declining XOM is underperforming the SP 500. Once again the amplitude only determine how much of the SP 500 XOM can purchase.

Note that the actual direction of price move is irrelevant. The SP 500 and XOM can both be in decline and the relative strength line will still rise if XOM is falling slower than the SP 500.

What is not shown is the RS line of gold to the SP 500 during this period. But during the bull market from 1982-2000 The SP500 outperformed gold. In other words the SP 500 was increasing in purchasing power (its ability to buy gold and commodities). XOM was outperforming gold too but at a much slower rate than the SP 500. During that period it was better (easier?) to own the index (or a stronger performing stock than XOM).

Harun's summary:

The measure of success of any investment is determined by the simple question, did purchasing power increase, decrease or remain unchanged?

During the 20-year Bull Market, Exxon purchasing power increased because it performed better than gold--but was it the best stock to own?

1988-2000 XOM grew better than gold (red) but underperformed the SP 500 (blue). Remember that the SP 500 outperformed gold during this period so while it didn't kill you to own XOM, implicitly you lost money for 12 years.

2000-2003 XOM underperformed gold and outperformed the SP 500 which was underperforming gold. XOM in this time frame would have been a bad investment.

2003-present is the only time that XOM outperformed both the SP500 and gold, makig it a sensible investment. But it must be noted that XOM cannot purchase as much gold as it did in 2005 even though it is showing a higher nominal price.

So what conclusions can we draw from plotting the relative performance of the broad stock market (S&P 500), gold against a leading oil/energy blue chip company?

Any investment performance must ultimately be measured not just against alternative investments but in terms of purchasing power.

These charts also suggest three other insights.

1. An investment may appear to be "doing OK," i.e. rising in nominal dollars, but meanwhile it is seriously underperforming other asset classes.

2. An asset may outperform for a period of time, and then underperform. "Buy and hold forever" may not be a successful strategy for establishing and maintaining outperformance.

3. Diversification may be a good idea, but diversifying into asset classes which are outperforming other classes and maintaining or growing one's purchasing power is an even better idea.

Thank you, Harun, for sharing your knowledge and insights.

Thank you, Rod C., ($10) for your generous donation to this humble site. I am greatly honored by your support and readership. All contributors are listed below in acknowledgement of my gratitude.

And here on the right is a chart of derivatives' growth, and one of real estate assets held by banks.

Do you see any parallels in all these charts? How about a spectacular ascent along an exponential (power-law) curve?

The primary feature of such an exponential curveset in species diversification is that it is periodically interrupted by extinctions. While most of us are aware that the dinosaurs were wiped out by a 20-KM wide (12-mile wide) meteorite which struck shallow water in the Gulf of Mexico 65 million years ago, fewer of us are aware that the number of types of dinosaurs (i.e. the number of different families) was already in decline prior to the meteor strike.

(Some claim a second later meteorite strike was the coup de grace).

In other words: dominant species tend to decline from internal forces. An external shock/change of climate may provide the final push to extinction, but internal causes have already weakened the diversity and genetic innovation of the species.

Dominant species "have their moment in the sun," so to speak, when they diversify rapidly and occupy numerous ecological niches, and then decline, either rapidly as the environment changes, or slowly shrinking to "safe" habitats. Charles Darwin noted this in his book Voyage of the Beagle:"On such grounds it does not seem a necessary conclusion that the extinction of species, more than their creation, should depend exclusively on the nature of their country (environment). All that can be said with certainty is that, as with the individual, so with the species, the hour of life has run its course, and is spent. "

In comparing the dinosaurs' passing to the exponential extremes which have proliferated in our financial realms, we have to ask: now that the subprime meteorite has struck, are all these "had their day in the sun" financial species doomed to extinction?

If all these dominant behemoths of the financial world were weakening from internal forces, perhaps the so-called "subprime meltdown" is the "event" which nudges them off the cliff to extinction.

Lest you think this impossible, consider the financial species "HELOCus Maximus," a.k.a. the home equity line of credit.

Note that this beast has already plummeted to near extinction. (A few survivors may yet exist in small pockets, but their days are numbered.)

Can hedge funds, commercial paper and consumer debt leverage be far behind? The mainstream media is chockful of stories these days on the "freeze" in new corporate debt, the "seizing up" of commercial paper, and the frenzied resuscitation of fallen giants--not just in the U.S., but worldwide:

Don't forget: The Federal Reserve is in crisis management at the moment. However, it doesn't want to show any signs of panic. That means no rushed cuts in interest rates. It also means that it wants banks to quickly take the big charges that will inevitably come from holding toxic debt securities. And it will do all it can behind the scenes to work with the banks to help them get through this upheaval. But waiving one of the most important banking regulations can only add nervousness to the market. And that's what the Fed did Monday in these disturbing letters to the nation's two largest banks.

Global junk bond issuance has been frozen for two months. Fresh sales of collateralized debt obligations – the CDOs of subprime notoriety: a $1 trillion sold last year - have all but stopped. Banks have yet to off-load $300bn of debt from leveraged buy-out deals, forcing them to keep the liabilities on their books. They are all snake-bitten now.

As the European Central Bank continues to try to resuscitate the European banking system with daily injections of cash, the fate of German banks is worrying. On Tuesday the chief executive of WestLB warned that a reluctance of foreign banks to provide credit to their German peers could lead to a banking crisis in Germany.

The recent bank problems and closures show that the German banking industry is going through a difficult phase. Not only a few individual banks, but the industry as a whole, are affected.

This is an excellent article which details vast, profound changes in virtually every aspect of banking in Germany--corporate funding, merchant banking, investment of surplus funds, etc. These adaptations mirror those experienced by all banks in the developed and developing world.

Though the adaptations were made to survive as financial species, it is becoming obvious that the adaptations have fatally weakened the species. Despite the happy-happy murmurings of central bankers, efforts to save the dying breeds of speculations and lending are clearly failing.

Allow me to speculate on what the Leading Dinosaurs were saying just after the meteor vaporized a big chunk of the Earth's assets: (Had they possessed the gift of language)

"Dear fellow dinosaurs, the most powerful and dominant species on this planet. A dark cloud has obscured the sun, but this disruption in our dominance is a temporary phenomenon, as there are plentiful smaller creatures to catch and vast tracts of lush vegetation to consume. There is absolutely nothing to worry about. We expect the cloud to pass in a few days. So just go on enjoying your dominance."

The cloud cover obscured the sun for one or two years. Every last dinosuar had starved to death long before any light broke through the leaden haze.

Perhaps the subprime "event" which has vaporized tens of billions of assets is the financial equivalent of the meteor which wiped out the dominant land species 65 million years ago. Will we look back in 5 or 10 years and wonder how the dominance of hedge funds, derivatives and exotic mortgages and corporate debt all vanished without a trace--other than the bankrupting of millions and the loss of trillions in financial assets?

Change one feature in a self-organized system (CHS--i.e., a market) and you get a reaction in many other dependent parts of the whole complex machine.

If the other inter-related parts' dependencies are poorly understood/obscure (i.e. subprime MBS, credit/debt derivatives and swaps), the parts themselves untested and inherently unstable, then you get what we have today: a financial house of cards--or concentric rings of dominoes, if you prefer that metaphor. Either way, it all comes down.

Put another way: the subprime meteorite has struck, and the financial sky is darkening with a gloom which will last for years.

Thank you, Narendra P., ($20) for your generous donation to this humble site. I am greatly honored by your support and readership. All contributors are listed below in acknowledgement of my gratitude.

In a related development, I received a desperate offer from Merrill Stench (Lynch), offering to "leverage my home equity with rates as low as 7.50% APR." Since when did investment bankers/brokers send out sleazy HELOC (home equity lines of credit) pitches? Since they're desperate for fees, as all their mergers fees and derivatives plays are evaporating like rain hitting hot desert sand? So now they've sunk to trolling for HELOCs?

Desperate doesn't do justice to ML's pitch. Time to short the Stench? Maybe.

Next up, Ron C. with an excellent analysis of rent/housing prices:

Home price/rent ratios have generally been negative for a number of years based on HPA (home price appreciation) the past ten years. The traditional price/rent ratio used a 100-200x monthly rent to generate a resale value for the home. With SFH (single family homes) entering into a long period of declining HPA it will become critical for true investors to use price/rent ratios property or their investment will quickly become a a monthly negative cash flow.

Using current home values in my area neighborhood Zip code 95476, 2br/2b homes are on the market for around $525K with rents averaging $1250 per month. These homes were selling in 1995 to 1997 in the $112K to $150K. If use the price/rent ratios as a range these homes today should be selling from a low of 100x 1240= $112K to a high of 200 x $1250= $250K.

It is easy to show that homes today that are listed for $525K in fact should be offered closer to $112k to $250k which would make them both affordable and a good investment and bring them much closer to the 1995 to 1997 price range.

Longtime correspondent azvitt made a telling comment about the blogosphere's leading role in analyzing/drawing attention to the lending/housing/debt bubble which is bursting:

It's really remarkable that the bloggers that I have been following for about a year and a half have led the way. I mean how many times have I seen Nightline or the network news reference, quote, or show a computer monitor view of many of the following sites?

And I doubt any of these bloggers could get a job at a mainstream outlet. Aw the beauty of the internet and the Average Joe!

Lone Cowboy checked in with a revealing account from the front lines of the housing bust:

So, in my business, I tend to get a lot of "come and mow this property, the weeds have taken over" either from a banker/real estate agent or from someone who has just purchased a foreclosed house. So, this one I went to yesterday was in a nice neighborhood and it had NOTHING. No landscaping, no deck, not even a concrete driveway. I actually initially went to the wrong house because next door has 3' high weeds also. (all are acre plus lots). Turns out no one lives at that one either, but it's not for sale (probably in foreclosure process).

This house was built 5 years ago and a large family lived in it and never did anything to it(basically paid rent in one I suppose). They paid $422,000 5 years ago. It needs $50,000 worth of landscaping (really it has nothing, just weeds) and I have no idea what's wrong with the inside. BTW, this "new high quality construction" house is already losing it's roof (shingles all over), the air conditioning unit is sitting there, but it's not hooked up and dirt is falling underneath the walkway (poor compaction) and all the trenches from the utilities are falling in also (also poor compaction). And of course, builders grade furnaces, hot water heaters, etc all need replacement at 8 to 10 years.

This guy paid $301,000 at auction for it. That's a 120,000 haircut for the bank. Plus the auction fee (usually 10%), plus foreclosure fees, cleanup, etc. The guy told me that the exact same house is about 3 blocks away (same development) but it faces E470 (the freeway) and it's still for sale at $479,000. I don't' think they are ever going to get 479k for that one, this one is now the comparable.

Just thought the whole thing was interesting.

BTW, people have 1 year jobs (can be laid off at any time) but we borrow money at 5 to 30 year times based on that one year job salary. Not too bright. Debtor's prison still lives.

Dan B. submitted a fascinating item on harbor traffic moving from Long Beach CA to a newly expanded port in Mexico:

Charles, I was looking at the I-35 super highway. You know,,,it's a 2 way highway. I was wondering what was going to move southbound. The Chinese company Whampoa is sick and tired of the expense and backlog at Long Beach / Los Angeles harbor. They also don't like paying wages to the Teamsters. (wikipedia entry on Hutchison Whampoa.)

The cumulative effect will be to pull a lot of processing jobs away from California. It will definitely cut out a lot of Teamsters. It's just one more step in the ongoing battle to diminish the wages of Americans. One more nail in the coffin of middle class Americans. Where does that lead.

Back to the 2 way highway. It runs through the heartland of America . . . the bread basket. It's not hard to see the day coming when America's food is sold to the highest bidder,,, and Americans are starving. The USDA reported in 2002 that 34.9 MILLION Americans reported . . . not enough food.

If the largest economy in the world can't feed it's own people, what's going to happen when the country goes bust? You can bet your soup kitchen that Con-Agra will ship the food to the highest bidder. BURN through the energy!!BURN through the water!!BURN through the top-soil!Profits and power at all cost. No suffering ,,, no sacrifice is too much!!What a disgusting slide we've come to.

Mark D. made two astute comments, one on the Pareto Principle in biology and another on Bank of America's investment in Countrywide (CFC), a.k.a. "Countryfried" :

In biology, we use a form of this principle for requeueing things. we deveople a procedure that works 80% of the time or greater. take the failures, find what works for those 80 % of the time.

in two rounds, you are at 96% success.three rounds, you are at 99.8% success.

of course it doesn't work out that way all the time, but it works pretty good. i'm sure the lending institutions break things down similarly based on repayment stats, risk, etc. obviously they got in trouble when they made the qualifiers go away. they are making up for it with loans greater than 30 years, what a joke.

I'm sure BofA's interest in countrifried is for real estate so they can relocate their offices. in general in the bay area, in case you haven't noticed, countrywide has EXTREMELY valuable locations. they perhaps lease them, but if any are owned, this would be a coup. i'm not sure why they think there is a market in insurance. as for why i'm a customer, it's only a matter of convenience for atm's for me. that to me is their best product. they are a far cry from the founder days of Giannini, financing the golden gate bridge, minority business, model branch location in outlying cities with excellent architecture like in hollister (they moved their branch there, totally stupid to facilitate drive-in banking which doesn't exist anymore and is a total waste of square footage. I had a family neighbor who knew the Giannini's, and she was extemely loyal to them. she worked at the bank for decades.

Michael Goodfellow raised a number of issues regarding yesterday's post on wages, Starbucks and wealth distribution:

You need to find different examples if you want to talk about rent inflation. The problem with places like Silicon Valley is they've restricted land use so severely that there's nothing left to build on. That's jacked up the price of an acre of land to hundreds of thousands of dollars. So the rent increase doesn't reflect a simple devaluation of the dollar. It's that plus a real increase due to legal restrictions. Also the increased costs of permits, taxes, etc. I forget how much of the purchase price of a house is purely permits (and delays caused by permitting), but it's tens of thousands of dollars. The Santa Cruz planning department was said to be larger than the one for Los Angeles, and it took months to get a house plan through them. This is not the case in places like the Midwest.

It would be interesting to compare rents in some place like Las Vegas which just annexed all the land it wanted for years when it grew. Or the empty parts of the west or upper Midwest. I wonder if they had rent increases above inflation?

Cities should of course build high rises when they run out of land, but NIMBY politics prevent that here. And there's a general desire in California to have businesses (which generate sales tax revenue) rather than homes (which require services.) The ideal for a city planner is a business core served by a bedroom community somewhere else. Funny how often you get that exact situation! Some people think this is a Prop 13 side-effect.

The rest of today's piece is the usual. Your background assumption is that the system "gives" people jobs. People create jobs by the exercise of their spending, and supply demand by the exercise of their skills. There are several root problems here, none of them "selfish rich people":

- China added a billion low-skilled and semi-skilled people to the world all at once. That's driven down the value of low-skilled workers.

- Technology improvements across the board have also dropped the value of low-skilled work. Cheap communications means you can run plants anywhere in the world. Cheap transportation means you can get parts and finished goods from those far-flung plants. Automation makes the plants more flexible -- reprogramming is faster than retraining people. A short product life cycle means the plant is obsolete in a few years, so you can just restart somewhere else if labor costs have increased.

- At higher skill levels, the rest of the world is steadily catching up to the rich world standard. We can't assume that an American high school graduate is 10 times as productive as a third world graduate. I think it's only 2 times as good now. That advantage can be negated by cost differences.

To focus this, think of the call centers. In 1970, it would have been insane to try doing a call center in India. The phone call would have cost several dollars a minute. The $5 an hour you would have saved in labor costs would have been overwhelmed by the $120 an hour you'd pay for phone charges. Now, the phone charge is like $0.02 a minute, or $1.20 an hour, and shifting that work to India makes economic sense.

Second, in 1970, India would have refused the work, because of their socialist attitude towards inward investment (the same for China.) Now, they don't. And finally, India is now willing to train a person to sound very American and answer questions about products about as well as an American would (despite the stereotypes, this is definitely the case.) American high-school grads on the other hand, aren't any better than they were in 1970. Arguably worse if you get someone with an entitled attitude.

So like I said, none of this has to do with your usual bogeyman of rich elites shafting the little guy. The economic/technological climate has changed, and we are standing around like dinosaurs.

As is often the case, I responded to Michael's sharply reasoned points with a few of my own:

Good point about land use but as I wrote before, land use was restricted in the Bay Area 10 years ago too but houses in Albany and Berkeley (good schools) were selling for $160,000, not $560,000. Therefore some other factors (speculation, etc.) have been at work.

Las Vegas has other conditions which skew data--low /no taxes due to gambling, and well-paid no-skill service jobs.

My point was that no one thought $1.60/hr was "too much money" back in 1969 yet merely keeping up with official inflation would make $9/hr the min. wage--and employers would be screaming.

My other point was that purchasing power declines have impacted the lower wage workers. This has nothing to do with China/India, which have lowered the costs of importable goods. I think the issue is the destruction of the dollar which has cut purchasig power far more than official CPI suggests.

As for rich/vs. poor, you only have to examine tax policy to see that wage earners in general carry more of the tax burden than they did decades ago when corp. and capital gains taxes were effectively larger percentages of tax revenue. It's not that the rich are so much more productive, it's that they have better lobbies and get their taxes decreased at the expense of wage earners--mostly the higher-income ones.

The Big Picture blog referenced an analysis on 8/20/07 that 60% of the Bush tax cut flowed to the top 2%. Not exactly a "middle class" tax cut. A trillion here in tax cuts and a trillion there, and pretty soon you're talking real money.

I think I have written about this but if not, I should, as the stats are all very damning.

And in the "lies, damn lies and statistical lies" department, Bill Murath offered this commentary on the utterly bogus "new home sales rise" headline which was deployed to goose the flagging stock market:

NEW RESIDENTIAL SALES IN JULY 2007Sales of new one-family houses in July 2007 were at a seasonally adjusted annual rate of 870,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 2.8 percent (±12.0%) above the revised June rate of 846,000 and is 10.2 percent (±12.3%) below the July 2006 estimate of 969,000.

I don't normally send along this stuff and I am sure that you know the above info. My few questions (obviously rhetorical for us and your readers): During my quest in the 70's and 80's trying the then fab mental diet of " Better Living Through Chemistry " I kept running into the same problem. Every single chemical I ingested was metabolized and wore off. And reality kept coming back. Is the better dope now? Or can the antidep's really make you and keep you this deluded that you believe this garbage?

Paloma ( who just turned 5 yesterday, on her first day at Kindergarten) could probably come up with the +/- 12% number. To me it is embarrassing to see something with that much statistical error, why bother.....because the losers with the government jobs producing this figures would be unemployable in the real world. I would barely rate +/- 12% an educated guess.

Of course on Bloomberg they said New Home Sales are up unexpectedly 2.9%. Of course when I read the headline I immediately called bullshit in my mind since the story left out the error nor neglected to mention that when times are good they do the y.o.y comparisons and when they are bad they do the month over month thing or which ever makes things look better.

Just mind boogling how stupid and inept the public has become here.

And for those interested in gleaning meaning from charts, frequent contributor Harun I. offered this chart of the Banking Index, plotted with its relative performance to the broader market, the S&P 500. I have taken the liberty of adding a few comments to the chart.

Thank you, readers, for an array of insightful commentaries and links.

Thank you, Michael K., ($20) for your generous donation to this humble site. I am greatly honored by your support and readership. All contributors are listed below in acknowledgement of my gratitude.

"The next shoe to drop will be jobs. You have wisely touched on this before. People look at jobs losses and think in linear terms but what is understated is the multiplier effect. One person losing a job affects everyone in his/her supply/service chain causing a feedback loop. The effects of losing 3 million well paying manufacturing jobs was forestalled by cheap labor (illegal immigrant and offshore), cheap goods, credit cards and housing price inflation (Housing ATM).

But American taxpayers are fed up with illegal immigration. Wal-Mart says customers are struggling to afford their everyday low prices. Cheap goods from China have come at the cost of dead pets and poisoned children. Banks are getting stingy with credit (my sister-in-law tells me that BofA will not reissue credit cards to people with a 620 FICO score which contrasts with not too long ago giving away credit to illegal immigrants with no credit score) and the Housing ATM is effectively out of cash.

Judging from the savings rate, for most, there is simply no way to prepare for what will come. No savings, stagnant wages, negative cashflow and a ton of debt, what will they do? I remember an incident where I overheard a classmate of mine, somewhat apprehensive about what was to come, ask one of our instructors how to prepare for Hell Week. The instructor quietly asked him how would he prepare for a kick in the groin. They locked eyes for a long moment, the student gave an almost imperceptible nod of understanding and walked away."

1. high-paying jobs for non-young/non-techies are vanishing and not being replaced

2. Americans are ill-prepared for "belt-tightening" due to high debt payments

3. Even as wages have stagnated/remained flat since 2000, employers' costs continue rising

4. Purchasing power has dropped far below what it was a generation or two ago.

This last point is important. The $1.60 minimum wage I earned in 1969 is worth $9.08 in today's dollars, according to the official Bureau of Labor Statistics Inflation Calculator. (Scroll down to Get Detailed CPI Statistics)

Yet a young acquaintance of ours who worked at Starbucks (fortunately he just got a job which pays more and has regular hours) reports that he was paid $7.65 per hour before receiving a raise to $8.25--which is 10% less than I earned at minimum wage in 1969.

He also reported the average shift at the local Starbucks is 4.7 hours. Why the weird length? Because at 5 hours, the employer has to provide a lunch break. So if you ever wondered how Starbucks generates their huge profit margins, wonder no more.

Did I mention that the average rent for a small apartment in this area is $1,000 and up? In 1974 I was still able to rent a studio apartment for $125 per month--in Honolulu, long one of the nation's priciest cities to live in. According to the BLS, that works out to $528 in today's dollars. Good luck on finding a studio apartment in Honolulu today for $528/month. If you double that number, you're getting close.

I can go on and on with accounts like this. Another friend was a newly minted engineer in San Jose in the late 60s, earning $10,000 a year, ($60,000 in 2007 dollars) and he rented a nice new apartment for $150/month--$800 today. That apartment would cost 50% more to rent in today's money.

Another buddy supported an entire household of hippies in Pittsburg in that era with his job at U.S. Steel. Try supporting even a few kids on one job nowadays.

Let's take a look at the jobs which were created in this "global economy has never been stronger" era (Treasury Secretary Paulson's snappy line): leisure, construction and government jobs.

Leisure: tourism, dining out, all those generally low-paying service jobs. What do you think happens to dining out and tourism in a recession? As discretionary consumer spending, they are first on the list of what gets axed from family spending.

Construction: good-paying jobs, but we know what's happened to construction employment--and it's not coming back for a long, long time. You were making $25/hour as a carpenter? Here's your new job, pal--$8/hour at Starbucks. Oh, and your shift is only 4.7 hours long.

Government: Although government employees tend to forget this inconvenient truth, all that tax revenue is skimmed off productive businesses and wage earners. As the housing bust and the looming recession strangles profits, sales and wages, guess what happens to tax revenues?

Barry Ritholtz, proprietor of the The Big Picture wrote an excellent entry on August 21, 2007 documenting the fact that real wages have actually declined in the past 6 years.

But as the chart on the right reveals, employers' labor costs are rising. The reason labor costs can rise while wages decline is easy: overhead costs are rising--the costs of employment other than wages: health insurance, workers' compensation insurance, taxes, etc. Bottom-line: employers are getting squeezed, meaning there are good reasons to hire as few employees as possible.

Let's also consider all those financial services jobs which are vanishing. One story in the media after another has chronicled young high-school graduates who entered the mortgage loan trade as salespeople, earning $100,000+ a year from writing mortgages for their friends and speculators.

You were earning $10,000 a month writing subprime loans? We got your new job right here, buddy--$7.65/hour at Starbucks, Oh, and we only need you for 4.7 hours, and tomorrow you open at 5:30 a.m. and the next day you close at 11 p.m.

Let's review job-market reality: High-paying financial-services jobs? Gone for good. Ditto big-bucks construction jobs. Real-estate speculation profits? History. Fat government payrolls? Good for now, but check back in 2008 when tax revenues fall off a cliff.

But what about all those great Web 2.0 tech jobs? Sure--if your start-up gets funding, if you're under 30 (old folks cost too much in overhead) and as long as you're prepared to get laid off next year as Web 2.0 does a dot-com Redux melt-down . . .

The sad truth is most working Americans have sustained their lifestyle in an economy of flat wages and declining purchasing power by borrowing vast sums which they now must pay off. (See chart above.) To add insult to injury, even losing your home isn't the end of your pain--it's just the beginning, as all that forgiven debt is viewed as income by the I.R.S.: (thanks to frequent contributor U. Doran for this story from from the New York Times): After Foreclosure, a Big Tax Bill From the I.R.S.

Aren't those financial services folks who provided these homeowners with a loan at 14% really wonderful? And how about our government, happy to collect taxes on your catastrophic losses? Really serving the citizenry, aren't they?

Just for a refresher, here are the facts on who holds the wealth of this nation. It's sad, isn't it, how Joe and Jane Citizen tried to keep up with the Jones's, Sanchez's and Wongs by borrowing to the hilt and speculating with housing, all in a desperate bid to have the lifestlye they saw paraded around on TV.

It's not the 1% who are about to experience Hell Year/Hell Decade, it's the rest of us with no savings, no assets, declining income and purchasing power, and soon, fewer jobs.

Thank you, Robert P., ($11) for your generous and much-appreciated donation to this humble site. I am greatly honored by your support and readership. All contributors are listed below in acknowledgement of my gratitude.

Thursday, August 23, 2007

Two historically irresistible patterns suggest speculative-bubble housing values will eventually retrace back to their 1995-1997 levels:

the symmetry of speculative rises and retracesthe unbreakable links between income and housing values.

To get started, let's stipulate that the Great Housing Boom of the past decade was not a housing boom--it was a speculative debt-fueled bubble which happened to occur in the asset class known as real estate. As a speculative bubble, it shares the same characteristics as other speculative manias in tulips, stocks, toilet paper, etc. (Note that there is one key difference between worthless stock certificates and toilet paper: the TP has a practical use.)

Let's look at a speculative bubble in real estate which is finally running its course: the one which has unfolded in Japan over the past 15 years:

While the symmetry isn't perfect--the decline took 50% longer than the rise--for purposes of illustrating what lies ahead I've prepared a chart of California housing prices:

Speculative bubbles in the stock market tend to shoot up and then plummet in relatively short time spans. Here we see that the dot-com era bubble in NASDAQ took a mere 3 years to reach euphoric heights in which risk was banished, and a roughly similar length of time to give up all the bubble's gains, and then some.

Real estate trends stretch out over much longer time spans, and as a result we can foresee a lengthy, painfully drawn-out decline in housing values over the coming decade.

Just as stocks break free of fundamental metrics of value in speculative manias, so too do houses. But just as stocks retrace to historical levels of price-earnings ratios, so too will housing retrace to historical levels of income-to-value ratios. Historically, this is about 3-to-1: long-term, houses cost about 3 times household income. Since the median household income in the U.S. is abour $46,000, U.S. incomes would support house values of abour $125,000 - $140,000.

As I have noted before, my parents/step-parents each bought houses in highly desirable locales in the early 70s (Honolulu and Pasadena) at 2:1 (twice annual income) and 4:1 (four times a schoolteacher's annual income to buy in highly desirable Manoa Valley in Honolulu.)

As recently as 1997, friends were purchasing small homes in very desirable S.F. Bay Area communities for $160,000 - $175,000--four times a modest (for this area) household income of $40,000.

In other words, to return to a normal trendline, one that was in place a mere decade ago, even the most desirable areas will command no more than 4 times median income. That would put house prices in Honolulu, the S.F. Bay Area, West L.A., Connecticut, Northern Virgina, etc. at about $180,000 - $200,000 -- not $600,000.

New correspondent Jim V. provides an excellent overview of how the market could return to historical norms:

After reading yours and other blogs I now have a firm understanding of the housing bubble and credit crisis.

What I have not seen is a solution to these issue. I've seen statements saying millions will lose their homes to foreclosure. These are said in a manner like it is a foregone conclusion.

Here is an idea on how to prevent the foreclosures:

-If buying a house, first find out the medium family income for the area you are interested. Then offer 3 times that amount and not a penny more.

-If selling a house, do the same thing by pricing the house at 3 times the medium annual income for that area.

-Assessors should start re-assessing homes using the above guidelines.

-Institutions that service existing loans should immediately restructure the loans terms so that the principle amount equals 3 times the medium family for the area.

I've been reading that traditionally (in the not to distant past), paying 2 1/2 to 3 times your annual income for a house was typical.

An end must come to this idiocy and it will come from a grass roots movement.

Thank you, Jim. Well said.

Thank you, Dan B., ($25) for your unexpected and very generous donation to this humble site. I am greatly honored by your support and readership. All contributors are listed below in acknowledgement of my gratitude.

Wednesday, August 22, 2007

In this era of ever-increasing specialization, few interdisciplinary studies attempt to correlate the apparently disparate but deeply interconnected fields of weather, food production, potable water, the global financial system, geopolitics, trade, disease and species extinction.

Astute reader Dan B. sums it up succinctly:"The world has become so big that people become myopic. The big picture escapes them. The problem is that everything is inter-related. I've read several people who seem to have a good grasp of the world financial picture,,, but know nothing about weather.

In our hubris, we believe that we can keep mother nature at bay. How many financiers know that 44 countries are in drought? How many know how many countries are currently flooded? Does Barnanke know that the world production of cereals crops is negative? Does Poole know that the water supply is about gone in many countries?"

Dan sent in two interesting stories which highlight just how little we understand large-scale interconnected systems:

To Dr. Kukla, the fundamental issue here could not be more clear. For millions of years, the geologic record shows, Earth has experienced an ongoing cycle of ice ages, each typically lasting about 100,000 years, and each punctuated by briefer, warmer periods called interglacials, such as the one we are now in. This ongoing cycle closely matches cyclic variations in Earth's orbit around the sun.

"I feel we're on pretty solid ground in interpreting orbit around the sun as the primary driving force behind ice-age glaciation. The relationship is just too clear and consistent to allow reasonable doubt," Dr. Kukla said. "It's either that, or climate drives orbit, and that just doesn't make sense."

For a taste of other interrelated complexities, consider these diverse articles:

Future Farming: A Return to Roots? Large-scale agriculture would become more sustainable if major crop plants lived for years and built deep root systems (Scientific American)

Summary: China's environmental woes are mounting, and the country is fast becoming one of the leading polluters in the world. The situation continues to deteriorate because even when Beijing sets ambitious targets to protect the environment, local officials generally ignore them, preferring to concentrate on further advancing economic growth. Really improving the environment in China will require revolutionary bottom-up political and economic reforms.(Foreign Affairs)

The Gobi Desert, which now engulfs much of western and northern China, is spreading by about 1,900 square miles annually; some reports say that despite Beijing's aggressive reforestation efforts, one-quarter of the entire country is now desert. China's State Forestry Administration estimates that desertification has hurt some 400 million Chinese, turning tens of millions of them into environmental refugees, in search of new homes and jobs. Meanwhile, much of China's arable soil is contaminated, raising concerns about food safety. As much as ten percent of China's farmland is believed to be polluted, and every year 12 million tons of grain are contaminated with heavy metals absorbed from the soil.

Two-thirds of China's approximately 660 cities have less water than they need and 110 of them suffer severe shortages. According to Ma Jun, a leading Chinese water expert, several cities near Beijing and Tianjin, in the northeastern region of the country, could run out of water in five to seven years.

In the spring of 2007, Beijing released its first national assessment report on climate change, predicting a 30 percent drop in precipitation in three of China's seven major river regions -- around the Huai, Liao, and Hai rivers -- and a 37 percent decline in the country's wheat, rice, and corn yields in the second half of the century. It also predicted that the Yangtze and Yellow rivers, which derive much of their water from glaciers in Tibet, would overflow as the glaciers melted and then dry up. And both Chinese and international scientists now warn that due to rising sea levels, Shanghai could be submerged by 2050.

Researchers in the United States are tracking dust, sulfur, soot, and trace metals as these travel across the Pacific from China. The U.S. Environmental Protection Agency estimates that on some days, 25 percent of the particulates in the atmosphere in Los Angeles originated in China. Scientists have also traced rising levels of mercury deposits on U.S. soil back to coal-fired power plants and cement factories in China.

Led by pork and other meats, consumer prices for food were up 15.4 percent in July from a year ago, pinching unskilled workers and other low-income city dwellers, to the alarm of top Chinese officials.

Floods in southern China have hurt crops in this region. Grain prices have been rising globally because more grain is being used for ethanol production and because increasingly affluent people in developing countries are buying more grain-fed livestock and poultry. Large numbers of pigs have been dying from diseases, driving up pork prices."

Lastly, I want to recommend a book I'm currently reading:

Extinction: Evolution and the End of Man . The paleontologist author looks at 400 million years of changing climate data and extinctions/die-offs, and concludes that humanity may well be setting up the conditions for its own extinction. Fun stuff indeed!

What can we glean in the way of a truly "Big Picture" from these and dozens of similarly thoughtful, well-documented articles? Let's start with a short list:

1. Globalization of industry and trade creates high densities of humans and animals and rapid delivery of goods, people, pollution--and diseases. If 25% of the particulates in Los Angeles are coming from China, will China eventually be held responsible for 25% of the costs of treating residents of Greater L.A. who contract (non-cigarette-caused) lung diseases?

We know that HIV lurked in small isolated pockets in Africa for decades before exploding (via tourism and travel--the first vector was an airline employee) into the world beyond.

We also know that avian influenza, a.k.a. "bird flu" is not dormant just because it has largely disappeared from the Western media. Though experts continue to argue about the relative likelihood of the disease mutating into a virus that could spread from human to human, the odds of such a mutation (which caused the 1918 global flu pandemic which killed tens of millions) rise with each human infection.

2. Desertification and changing weather patterns heighten the likelihood of global food shortages within the next 5 years. As the developing world's populations become as obese as their developed-world counterparts, it's hard to imagine a world in which there isn't enough grain for humans and their livestock, not to mention ethanol for fuel. But one look at the above graph should sober anyone who is confident grain surpluses can continue forever. One factoid making the rounds (unconfirmed by me) is that if every person in China eats one more grain-fed chicken a year, much of the grain crop of Canada would be needed to feed those 1.3 billion chickens.

3. Extreme weather events are clearly increasing in number around the world. Setting aside the causes--there are very likely more than one--let's consider the possibility that massive flooding in North Korea and Britain, deadly heat-waves in southern France, cyclone winds in central Europe, long droughts in Australia and elsewhere, etc. etc. are not necessarily linked but are nonetheless the results of the same causal factors. Is the recent rash of extreme weather merely random? That seems like quite a stretch of logic and probability.

The more "ifs" you string together, the more likely disruptions may occur: if weather extremes continue to increase, if oil becomes expensive, if water shortages develop, and so on. Yes, each of these problems can be addressed technologically: tractors can operate on solar panel-supplied electricity, drip irrigation can lower water useage, etc. But each solution requires energy and money to implement. The market may well encourage such solutions--but that won't be enough to save the world's oceans.

5. The world's oceans reveal the failure of "market forces" to adjust in sustainable ways. Despite the decline of world fisheries, in some cases by 90%, fleets continue to scour what's left for tidbits of fish which various populations will pay high prices to consume. Once the adult fish populations are reduced and habitats spoiled (reefs dynamited, water polluted by sewage and pesticides, etc.), the fisheries are damaged to the point of slow (decades) recovery--or even "never," as in extinction.

The only case I know of where fisheries are controlled in a sustainable fashion is the U.S., which strictly regulates catches in certain fisheries. So much for "market forces;" it's "Big Government" which enables sustainable fisheries. "Market forces" are what is bringing you fish and shellfish from Asia which may or may not be laced with pesticides and heavy metals. Nobody knows, and buyer/consumer-generated "market mechanisms" are threadbare "nets" filled with gigantic loopholes. That "inspected" label is worth precisely nothing unless it's a USDA stamp--and even then, one has to wonder about the rigor of the testing.

You need more than an occasional inspector--you need an entirely different aquaculture and a mutli-layered legal system with regulations, consequences, rigorous inspections at several stages, etc. Anyone who thinks "the market" will create this infrastructure is in an ideologically fueled fantasy. The infrastructure requires more than Safeway can manage--it requires governmental-level commitments to public safety and regulations.

6. Very large-scale forces which are not visibly causal may be at work. For instance, population studies suggest that organisms whose populations explode to beyond their environment's "carrying capacity" eventually experience a die-off/severe decline in population. The exact causal agent could be starvation, conflict, or disease, or some combination of causes.

For human examples, we have the Mayan civilization, which suffered a rapid decline due to a number of interconnected factors. For more on the Maya, here is an excellent National Geographic article:

Thank you, Paul K. ($25), for your unexpected and very generous donation to this humble site. I am greatly honored by your support and readership. All contributors are listed below in acknowledgement of my gratitude.

Monday, August 20, 2007

Quadruple Whammy Meltdown

Let's review the past two Great Bear Markets for clues about the one which lies just ahead.

The Great Depression, 1929 - 1946. If we cut to the chase, we find the Great Depression was essentially a credit/debt/leverage bubble of epic proportions which finally blew up. Various other factors (raising tariffs to choke off international trade, for instance) undoubtedly made a bad situation worse, but the Depression was caused by an unprecedented explosion in credit, leverage and risk which eventually led, as it always does, to a credit contraction and "renormalizing" of risk.

Let's start by noting oil has risen from $10 in 1999 to $71 today. The Standard Line is our economy is much less dependent on oil for production of goods and services, so this seven-fold increase is no big deal. Perhaps--or has the effect simply been obscured by deflationary imports from China and Asia, and a little agency "tweaking" of the consumer price index?

As for structural problems with the U.S. economy--the list is long indeed. Sagging productivity, rising local taxes, a dollar which has lost 1/3 of its value in 5 years, stagnant real wages, most of the jobs created since 2000 have been in housing or financial services, both of which are speeding off a cliff, labor/benefits costs which are increasing far faster than official inflation, Medicare and entitlement spending rising far faster than the economy or tax receipts, a hugely expensive, hugely unpopular overseas war is grinding through thousands of young Americans and hundreds of billions of (borrowed) dollars--hmm, let's just start with that short list, shall we?

Notice any parallels? How about an economy whose decay has been masked by a speculative frenzy in financial services and lending/leverage based on real estate? How about decaying wages and rising real costs? How about stagnant productivity and employment? How about a draining unpopular war? How about structural Federal deficits without end?

What this means is the coming Recession will be a Double-Whammy, combining the debt/leverage excesses of the 20s with the skyrocketing costs of energy, stagnant productivity and wages and hidden inflation of the 70s.

But wait--there's more! The oil spikes of the 70s were artificially induced: the Saudis expressed their displeasure in 1973 with an oil embargo against the U.S., and the Iranian Revolution in 1980 provided a political headlock on oil markets.

Now we have something completely different: a true imbalance between total supply and demand. This is the core of Peak Oil: there is more global demand for oil than there is global supply. We are teetering on the balance beam right now at 84 million barrels a day in both supply and demand; but as China's demand rises by 15% every six months, that will soon tip into an imbalance which cannot be rectified by the Saudis pumping another million barrels a day (if they even can increase production by that amount, which is doubtful).

So we have a Triple-Whammy on our hands. No, make that a quadruple-Whammy, because never before in history has the bedrock of American middle-class wealth--housing--been exploited in a stupendous speculative bubble. Sure, those "regular people" who had speculated in stocks (leveraged 10 to 1 via margin) were hurt when the market crashed in 1929, and when banks folded, many lost their life savings.

But now everyone who owns real estate--the 70% of the citizenry who isn't poor--is going to get hurt as the speculative bubble collapses. That too is unprecedented. And as interest rates rise and the stock market enters a decade-long decline/malaise, everyone with a pension or IRA invested in standard bond and stock funds will see their savings decimated.

The risks inherent in globalization might well be a fifth vulnerability which will exacerbate the depth and pain of the coming recession. Globalization has been around for several thousand years. The Romans imported vast quantities of wheat from North Africa, and Arab traders made fortunes bringing goods from Indonesia and India to Mediterranean Europe. But we now relie on global trade to an unprecedented degree for goods and financial liquidity.

The uninterrupted flow of cheap energy is the essential ingredient in global trade, and that commodity is widely seen by experts as shooting to $100 per barrel or more in the near future. So much for cheap energy.

As noted here and elsewhere ad nauseum, China has enabled the U.S. debt frenzy by sinking $1.3 trillion of its foreign reserves into U.S. Treasuries and other bonds. As China and other nations pursue a strategy of broadening their ownership of U.S. assets into stocks, red flags are suddenly shooting aloft, as long-time correspondent Albert T. noted in recommending this article from the Council on Foreign Relations:

The next globalization battle lurks over the horizon, but you can already guess its contours. It will be shaped by two revolutions in finance and business: the growth of vast government-controlled investment funds abroad and the muddled progress toward shareholder democracy in this country. Taken together, these changes will give foreign governments a say in how corporate America is run. Lou Dobbs is going to love this one.

The rise of government investment funds suddenly preoccupies financiers. Treasury officials who never before gave a thought to these outfits now want them on their speed dials. Five years ago, governments were sitting on $1.9 trillion in foreign currency reserves, which was roughly what they needed to stave off financial crises. Now they have $5.4 trillion, way beyond their prudential needs and more than triple the amount in the world’s hedge funds. Increasingly, this cash is being moved into “sovereign wealth funds,” which have come from obscurity to manage assets worth an additional $1.6 trillion

Frequent contributor John B. recommended this essay on the same subject:

Every game has two players, of course, as China reminded the world when it raised the spectre of its "Nuclear Option," e.g. dumping its holdings of dollars and U.S. bonds on the market. Our formidable Treasury Secretary Paulson was quick to dismiss this talk, but the Chinese have their own self-interests to protect--as does every nation--so their threat should not be dismissed as idle chatter.

Given the risks inherent in such a global trade in goods, bonds and currencies, perhaps we should add this unprecedented complex of unstable risks as a fifth factor, making the current situation a Quintuple-Whammy. I will be poking around the theme of "What Lies Ahead" this week, with plenty of reader input as always.

Speaking of which: we have fascinating new essays from frequent contributor Protagoras and longtime author (and new correspondent) J. Joss, the lead paragraphs of which I tantalizingly reproduce below:

You are all probably reading this on either Windows or Mac OS. There is a phenomenon at work in Linux and Open Source which may make the business model of both Microsoft and Apple obsolete and unsustainable in fairly few years. How probable it is that this will happen I am not sure. But that it is possible, I am certain.

The phenomenon is the power of a business model in which there are unlimited derivative works. (more)

It is ~700 miles from Houston to Tampico, through south Texas and across the border at Brownsville to Matamoros, world capital of flies. Half way between Matamoros and Ciudad Victoria, in the middle of a desolate Mexican highway, the Ford stopped abruptly. In retrospect I suspect a broken camshaft.

Career choices remain, for most of us, the highest life risk. Bad decisions, early, may spell doom. The rot may set in while we are still in our teens, picking poor study specialties that become dead ends. Though we will each have ten or more separate jobs during our working life, it’s better to work into areas with genuine career potential. Buggy whips are no longer made in quantity. Repairing typewriters is not a growth trade.

The most significant risk I ever took was trying to become a writer. To be accepted as a writer is to offer one’s most intimate self——the mind and heart——for public appraisal. If this leads to authentication, so much the better. If not . . .

I have updated Readers Journal so please enjoy these four diverse essays and this week's readers' comments on Presidential Race Musings.

Thank you, John B. ($21.12), for your generous and most interestingly numbered donation to this humble site. I am greatly honored by your support and readership. All contributors are listed below in acknowledgement of my gratitude.

Saturday, August 18, 2007

Presidential Race MusingsAugust 18-20, 2007

I am not an ideologue, so prepare to have your most cherished political beliefs challenged. Though I am not an ideologue, I have been deeply fascinated by politics since the 1960 election, when I was six years old. I was thrilled to vote in 1972 for the first time, and have switched party affiliations freely to vote for or against the candidate of my choice.

I have often voted for third-party candidates (heck, I was one of the Triumvrate which ran a third party in Hawaii 1974-76), as the general-issue parties have long struck me as essentially equal in the sense that whenever they gain power of both legislative and Imperial--oops, I mean Executive--branches, they bollix up the economy, the nation and indeed the world.

There are a lot of moving parts to a Presidential election, and therefore the outcome cannot be predicted. Back in the days of smoky backrooms, the party hacks chose the candidate, or so the cliche goes, and then sold the masses on the brilliance of their pick. But this simplifies the process to the point of uselessness. Did anyone predict that Richard Nixon would rise from the political grave he'd been dumped into in 1962 and become president? No.

It's generally accepted that the party faithful have had more of a say in the process since the McGovern debacle of 1972. But again, that simplifies the process. It's not the party faithful who elect a President--it's everyone in the middle. The Powers That Be of course attempt to select candidates in both parties which are acceptable to them, but they don't always succeed. I have made the case before that Cowboys like Richard Nixon are actually not the elites' candidates of choice. Events and abrupt changes of national mood are beyond their control.

Therefore the interesting aspects of any presidential race come down to this: why would a generally passive citizen rise up to vote when he/she rarely bothers, and what powers that citizen to vote for one candidate over the other?

The answer of course is: they hate one candidate and feel OK about the other. The reason why Nixon could only squeak by Humphrey in 1968 is that Nixon was well and truly loathed by millions of people who got off their duffs to vote for the Happy Warrior from Minnesota.

The other reason is they're mad as Hell and they're not gonna take it any more. (If you haven't yet seen one of my all-time favorite films, Network then by all means rent it, as it is the source of this famous line.)

The reason why Nixon won in 1968 was the cities and campuses were afire, the war in Vietnam was chewing up innocent American and Vietnamese lives at a prodigious rate, crime was rising and disgust with President Johnson was near-universal.

Americans vote for likeable candidates. Unless pushed against the wall, they will vote for the likeable, charming, easy-going person. Given the high level of disgust with the Republicans in the post-Watergate era, Gerald Ford should have been absolutely buried by Jimmy Carter. (More on that in a moment.) But Carter was, despite his famous grin, not a very personable guy, while Jerry Ford was a WYSIWYG guy (what you see is what you get), basically a decent person in the wrong party at the wrong time facing a media hungry to draw blood.

There are two reasons why Carter won: he was Southern, and he had The Big Idea. Every Democrat who actually won the election (other than Jack Kennedy in 1960) in modern times was from a Southern state. Thus Nixon's strategy for winning (and he needed something, for he was a flat-out unlikeable guy) was called "The Southern Strategy," in which he pandered just enough to Southern conservative Democrats to get them to vote against their party.

As for Kennedy winning, three points overcame the negative of being an elite Northerner:

1, The Mob roused enough dead guys to vote for him in Chicago to carry Illinois by a razor-thin margin. When Bobby began his Irish-Cop routine as Attorney general, nailing the same hoods who'd engineered his brother's win, well, that didn't go down so good. So the hit was made in Dallas, and the patsy assassin was bumped off in broad daylight in Police HQ by a Dallas hood who nobly agreed to fall on his sword for the Mob (Jack Ruby, nightclub owner).

2. Kennedy was sincerely charming and likeable, Nixon was not. Jackie was a star, and Americans are suckers for stars.

3. As the first Catholic candidate with a chance of winning, Kennedy motivated the faithful to get out and vote for him.

To recap modern elections:

1960: Economy good, Cold War hot, two veterans, one likeable, one not, mild religious angle, too close to call, likeable guy won probably due to Mob work in Chicago. Star appeal and glamorous wife didn't hurt.

1964: Economy good, Cold War cooling, Goldwater essentially a crusty old man, Johnson a personable if overpowering-in-person good ole boy; Goldwater's Big Idea (stand tough against the Commies, use nukes if necessary) was dated, good for 1952 but no longer relevant in 1964; Johnson's Big Idea (civil rights, righting historic injustices) rang true with the times. Johnson won in a landslide.

1968: Country going to Hell in a handbasket (at least to those paying taxes and getting mugged), military bogged down in endless war, Democrat's Big Idea (civil rights) was already enacted, Humphrey's voice and demeanor too shrill to overcome disgust with Johnson and the war, unlikeable "tough guy" Nixon won in a close election thanks to his Western origin and "Southern Strategy."

Important note: governors win Presidential elections, senators and representatives do not. To be a governor, you must herd enough political cats to actually get something done. If you can pull this off, then you are qualified for the basically impossible job of President. Congress is a rarified fantasyland and the skills needed to get stuff done there do not translate to the real world.

Case in point: Johnson was always babbling that if only he could get Ho Chi Minh (leader of North Vietnam) in a room somewhere, they could work out a deal to end the war. In other words: Johnson's entire world view was that everything worked like the Senate, where you dragged your opponent into a smoky backroom and wheedled, cajoled, threatened, soothed and then cut a deal which was then carried out to the troops. This explains his abject failure in foreign policy.

It can be argued that Kennedy's initial fumbles on the world stage may well have resulted from his limited political experience in the senate; Nixon, though initially a representative and then a senator, had been Vice President for eight years. Though never part of Ike's inner circle, he was point-man in the Cold War and "bad cop" to Ike's easy-going (hey, another likeable guy experienced at herding cats) genial cop (who was very savvy beneath that affable exterior).

Being a Northern senator were negatives for Kennedy, but they were offset by the particulars mentioned above.

1972: A very muddy slog. The economy was sliding, but Nixon was on top of his game, triangulating China to offset the Soviet Union and implementing basically progressive domestic policies like block grants. McGovern as a Northern senator running against an incumbent did not have a snowball's chance in Heck; though likeable in person, his face and mannerisms did not come across as charming. Add in the debacles of "guaranteed income" and vice-presidential flubs and Nixon's extremely careful media campaign and you got a landslide.

The B-52s carpet-bombing Hanoi until the North Vietnamese ran out of Soviet-supplied SAM missiles didn't hurt, either. Never mind that Nixon's 1968 "secret plan to end the war" took four years and 25,000 more American lives and probably a million Vietnamese, Laotian and Cambodian lives--he got it done before the next election. Americans don't like wars which run longer than four years; if Sherman hadn't crushed Hood's army in 1864 and cut his way to the sea, guaranteeing eventual Northern victory regardless of Lee's brilliant defense of Richmond, then even Lincoln would have lost.

1976: Ford's Big Idea--WIP--"Whip Inflation Now"--was a dud while Carter's Big Idea--let's clean up a corrupt, inefficient and costly Federal Government--looked good to a weary populace. Ford, though briefly Vice-President, was a Northern congressman; Carter was a governor and a Southerner. It would have been a landslide had Carter actually been a likeable as opposed to a self-righteous person.

1980: A Western governor, very likeable and charming, versus an essentially unlikeable incumbent who'd allowed the Iranians to make him a hostage along with the 52 Americans in Tehran, an economy spiraling downard out of control and a weakened America seemingly flailing under the pathetic, corrupted Democratic leadership in a dysfunctional congress--no wonder it was a landslide. Reagan's Big Ideas: Soviet Union is an Evil Empire, and We Can Turn This Puppy Around--resonated with a nation weary of mismanagement, oil crises and faltering mis-steps on the world stage.

1988: The Elite's choice, Bush Senior, carried an impeccable Insider's resume: combat veteran, C.I.A. chief, Vice-President, etc. etc. The Democrats got one-third of the winning combination right for a change: Michael Dukakis was a governor, but he was a Northerner and did not come across as especially personable. The goofy photo of him in a tank was the coup de grace. Bush's malapropisms were legendary and not exactly winning; There was always something phony about his persona which is why he didn't win much bigger than he did. Neither candidate had a Big idea; Bush confessed he never possessed "The Vision Thing."

Important note: The taller candidate almost always wins. Dukakis was "height-challenged" and though his Greek-American supporters were rightly proud of his accomplishments and candidacy, they couldn't overcome the negatives of being a short Northerner without a Big Idea.

1992: A charming, personable southern governor--by gosh, the Democrats finally figured out the winning trifecta--and lo and behold, Clinton beat the elite, out-of-touch and basically blah/unpersonable Bush Senior, who was after all a Northerner without a Big Idea other than underlings should carry his wallet, and hence his amazement at the high technology of a supermarket checkout. Americans don't mind being ruled by an Elite, but they don't like their noses rubbed in it.

1996: Now the Republicans lost their touch, going with a surefire losing trifecta: an unlikeable Northern senator running against a tall, popular incumbent in a booming economy. Slam dunk, incumbent wins by a landslide.

2000: This one shares some features with 1964, only this time it's the Supreme Court which intervenes instead of the Mob. Note that the Constitution is very clear that elections are handled by the states; it was unprecedented, to say the least, for the Supreme Court to butt in on a case without Constitutional foundations. And just to prove the point, they announced the ruling could not be used as precedent. Nice work, guys and gals. The Mob respects your work.

A not-very-likeable Vice-President who was a senator (Nixon in 1964, Gore in 2000) gets lukewarm support from his popular predessessor (Ike, Clinton). Gore was a Southerner, a definite plus, but he was running against a Southern governor--two pluses. While Gore just didn't come across as personable, Bush had the same phony bonhomie as his father. But if you had to be stuck with one or the other on a long, dreary tramp-steamer trip, most Americans would probably pick Bush because he is by all accounts a likeable guy in person even if his public persona is smarmy.

Neither candidate had a Big Idea which resonated strongly, but Bush's well-crafted Compassionate Conservative line was more appealing at the time (due to disgust with Clinton's personal morals) than Gore's environmental-technocrat platform (reinventing government is a good idea but just not sexy enough to woo Americans). Were Gore to run against Bush tomorrow, he would undoubtedly win by a large margin, partly because his Big Ideas are now resonating globally (yes, even if they're wrong, they are still resonating).

2004: Take another unlikeable Northern senator and run him against a Southern governor incumbent in a time of economic good times, and you should have had a landslide for the incumbent. The fact that triple-negative candidate Kerry almost won the election revealed just how weak the Bush Presidency had already become. By all rights, he should have won by a landslide. If the Democrats had picked a winning trifecta candidate (personable Southern governor), they could have easily won the election.

OK, crystal-ball time. Yes, Hillary has loads of supporters who see her as the best hope to elect a female president, and some very smart, experienced people see Obama as the next (just happens to be African-American) Jack Kennedy. But they are both Northern senators. Those are two huge, historically powerful negatives.

And Hillary is by all accounts flat-out unlikeable. There is no way Hillary will win with a trifecta of negatives. Millions will be stirred from their passivity to vote for her, but tens of millions will be stirred from their NFL-induced daze to vote against her. No matter how much lipstick her handlers put on the pig of her candidacy, it is doomed. She is visibly not personable. The media is filled with stories of her staff cowering in terror as she reams them out in language suitable for carpenters or longshoremen. No way, no how, forget it.

John Edwards has a chance, because he's Southern and likeable, and he has a Big Idea which will undoubtedly resonate as the nation cascades into a deep recession next year: we need to tackle the inequality and poverty which is hurting the nation. Unfortunately, he is a senator, so he'll need some Kennedy-like "extras" which could push him past his opponent in a close race.

Ditto for Republican hopefuls like Fred Thompson. (Note to Fred: only one Hollywood actor is allowed per 100 years. Reagan took the slot, sorry.) He's Southern, but not a governor, and only so-so as a likeable guy. Mike Huckabee is an interesting guy because he already has two out of three going for him: he's a Southern (Arkansas) governor. If he proves to be sincerely likeable, and comes up with a Big Idea which resonates, he might get the win.

Romney is a Northern governor, a little too slick (i.e. phony) for my taste, and so he only has one out of three at this point. None of these guys--Thompson, Huckabee or Romney has a Big Idea that resonates or is getting any traction, and so they are unlikely to win. (Hint to candidates: Healthcare. If you come up with something other than complicated band-aids, your Big Idea will overpower your negatives.)

Ron Paul has the Big Idea--restore our currency--and he's Southern (Texas), but he's a congressman. He seems like a sincere, likeable guy, and so he has two out of three. Not being a governor is a real negative, however, as no representative has won the Presidency in modern times.

But here's the wild card. If the U.S. and global economies slide into deep recession in 2008, as all the evidence suggests is inevitable, Americans will be primed for another "I'm mad as Hell and I'm not gonna take it any more" moment of profound change. Politicos who are basically dabbling around the edges, trying not to make any fatal mistakes (i.e. Obama, Hillary, Thompson, Romney, Huckabee, et. al.) are not going to fire anyone's imagination. But a guy like Ron Paul just might: as the dollar and global financial excesses come apart at the seams, a guy with a record of integrity and a Very Big Idea which is currently dismissed as weird/fanciful/fanatic (back the dollar with gold) might just spark a wildfire of support.

OK, he had to get re-elected, he's a politician, so of course he's funneled Federal dollars to his district and done all the other things you do to win, regardless of your party affiliation. Even Nancy Pelosi has to bring home the bacon to her district. All of that is basically quibbling: what will rule is who gets closest to this ideal: Southern governor, likeable/personable, with a Big Idea which resonates with the problems and contexts Americans will be struggling with in 2008.

In a similar fashion, Edwards has the Big Idea which will resonate in bad economic times: correct inequality, strip at least some of the Elite's more blatant privileges, show some concerns for working-class issues--the very issues the Republicans have ignored by firing up Moral Crusade bandwagons against phony issues like gay marriage.

Yes, he's an attorney, and a rich one; but he came from humble roots and has suffered greatly as an individual and as a family. If he "feels your pain," it will be sincere because he has suffered great losses. I suspect Americans will be very, very tired of slick Elite dynastic candidates (Romney and Clinton, for instance) and be willing to give someone with a cause (Edwards) or a strong belief in what's needed to make things right (Ron Paul) a chance, just as they were willing to give unpersonable but morally upright Carter a chance in 1976.

This is not to say the other candidates aren't sincere in their beliefs or fixes--undoubtedly they are--but the point is this: The Big Idea has to be simple, and it has to resonate in this time. In very deeply troubled times--such as the era we are now entering--an unlikeable candidate like Richard Nixon can win if he projects the strength and conviction to push through his/her Big Idea To Fix What's Wrong With This Country.

If a Southern Governor like Mike Huckabee can come up with a sincere Big Idea which resonates in a terrible recession, and he is basically a likeable guy, he can win. But if times are as dicey as I expect, the disadvantages of being a congressman won't be enough to stop a candidate like Paul or Edwards with a sincerely held Big Idea. In my judgment, both Edwards and Paul are sincere about their Big Idea; those aren't issues some hack handler invented for their campiagn to "broaden its appeal."

One last issue. The winning candidate has to have the personal gravitas to be imagined as President. Hillary has it--of course we can imagine her standing up to other leaders. (Even if you loathe her, you have to grant her this, just as people who loathed Nixon knew he had the persona to be a tough President.) If voters can't imagine the candidate as President, they can't win, regardless of their other advantages. And names and height do count in this equation; if people can't imagine "President Huckabee" then Mike can't win, regardless of his sincerity and other advantages.

One last note. A lot of right-wing ideologues rail against Franklin Roosevelt (Northern governor and Elite's elite) but they forget (or never bothered to learn) that Roosevelt was likeable and charming, and he understood suffering in a way blow-hard talk-radio/TV pundits do not. As someone who contracted polio in the prime of his life, Roosevelt knew injustice, pain and suffering. He withdrew into a shell of exile for years. When he emerged, he had the strength to lead the nation through horrendously perilous times. Hoover had his chance, and though he was a very smart and personally good guy, blathering on about "the free market" didn't cut it in reality.

So the person who wins in perilous times must have had personal experiences of sufficient strength to lead the nation through times when there will be no easy solutions. Lincoln had it (deep, crippling depression) and Truman had it, too (combat soldier/officer in World War I).

Thank you, Ralph S. ($10), for your unexpect and generous donation to this humble site. I am greatly honored by your support and readership. All contributors are listed below in acknowledgement of my gratitude.

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